Taking Stock: SAP Stands Out Among CompetitionTaking Stock: SAP Stands Out Among Competition

To say that the business environment for large enterprise software vendors is horrendous is an understatement. A variety of causes are behind the current malaise. Most boil down to one issue: uncertainty. First, there's the sagging U.S. and global economic environment. The prospect for an economic recovery remains elusive, leading companies to defer investments in their business. Big-ticket items that may not yield an immediate high return on investment are postponed, so enterprise software purchases are delayed until better times. The other main cause, at least during the last few months, was the war on Iraq. The uncertainty relating to the duration and its impact on the global economy kept companies from spending. Now that the war has largely been concluded, this uncertainty has waned.

PeopleSoft Inc.'s and Siebel Systems Inc.'s early warnings of weak results came as no surprise given this somber backdrop. Siebel's decline in license revenue, however, was quite a bit worse than what most expected. Even though SAP's first-quarter earnings weren't stellar, they did underline some interesting trends. SAP saw total revenue decrease by 8% in the first quarter from a year ago to about $1.6 billion. Software-license revenue, meanwhile, declined by 12% to $386 million. Not great, but a lot better than the numbers posted by Siebel and PeopleSoft. PeopleSoft experienced a 38% drop in software-license revenue in the first quarter relative to a year ago, while Siebel saw its license revenue plummet 55%.

Competitors such as Oracle and J.D. Edwards & Co. saw application software-license revenue drop 5% and increase 7%, respectively. A final competitor in the supply-chain management space used to be i2 Technologies Inc. However, i2 appears to be collapsing under the weight of yet another accounting scandal. The company recently told investors that they shouldn't rely on financials from 1999, 2000, and 2001. Hmm ... very reassuring. Odds of i2 closing much business while it contends with the onslaught of class-action lawsuits and Securities and Exchange Commission investigations are slim.

The downturn in the software industry has led to an increase in SAP's market share in enterprise software, which now stands at 54%. SAP has clearly emerged from this downturn in a strong competitive position and with better products. This is the power of being the gorilla in an industry: Customers will turn away from marginal companies and deal only with the solid players, and the largest company's investment in research and development can continue uninterrupted. SAP's product slate suffered from gaping holes three years ago, but today most of those have been plugged.

SAP's recent earnings release provided another interesting data point. SAP was never run as a particularly lean company. That left the company with the opportunity to find large cost savings across the company, which we saw this quarter with operating income expanding nicely despite a decline in revenue. In the same vein, SAP stuck to its previous forecast of full-year earnings, while indicating that revenue could decline some and the company would still be able to reach this goal. Not bad. Unfortunately, with the stock trading at almost $26 per share, it's not cheap.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the information 100 Stock Index. Reach him at [email protected].